The story of the US economy over the past 40 years has been one of rapid technological change, growing corporate monopoly power, and deepening despair for a rising share of workers. There will be no happy ending unless the US radically changes its approach to managing the impact of innovation.
STANFORD – Have we entered a new Gilded Age, in which tech monopolies wield enormous political and economic power in the same way that Standard Oil did at the end of the nineteenth century? The scale of wealth being produced for a select few, along with the mounting despair of workers who are left behind by technology-driven economic change, certainly suggests that growing monopoly power is strangling parts of our economy. But the monopolies of the Gilded Age were very different corporate creatures from the technology driven monopolies that have arisen in recent decades.
The Gilded Age monopolies were created via collusion, intimidation and bribery by corporate bosses. They were eventually rendered illegal by antitrust laws. Today’s monopolies, however, are legal and were created by true innovators who received various forms of legal protection as their firms rose to dominance. John D Rockefeller, J. P. Morgan, Andrew Carnegie or Cornelius Vanderbilt were corporate bosses, not innovators like Jeff Bezos, Sergey Brin, Steve Jobs and Mark Zuckerberg. So, in contrast to the antitrust policy of the past, what is needed today is an approach to monopoly power that relies on policy which is both subtle and complex. And this requires that we reconsider many of our prior biases and preconceptions about what a “free market” truly means, and about the role of government in that market.
Whereas the US government, in 1911, broke up Standard Oil into 34 companies for its violations of the 1890 Sherman Antitrust Act, an effective policy toward contemporary monopolies will require legal adaptation to the new reality: a new approach to taxation, regulation, patent laws and labor markets. Here, I focus on the labor market, and the need to establish a principle of “required compensation” for workers whose lives have been damaged by today’s new monopoly power. Such compensation should – indeed, must – be the basis of a strategy to correct the negative consequences of today’s misguided policies, which have allowed the increasing concentration of enormous wealth, accompanied by the despair of many millions of ordinary American workers who see the future foreclosed to them.
Surprisingly, given Silicon Valley’s supposed left-wing political orientation, many intelligent people in Big Tech reject such a principle for public policy, which runs strongly counter to the libertarian ideas that prevail in their industry. Companies, according to this view, have the God-given natural right to engage in “creative destruction,” without the government taxing them or otherwise interfering with them to compensate those whose lives are broken by the destructive side of innovation. But the conditions they support, and which prevail in the current labor market, are simply unsustainable, both politically and economically. Changing these conditions will require a better understanding of what a “free market” really is.
The case for government action can be made using common sense. When a government builds a road, it compensates landowners whose property is needed for the construction. When an oil company is granted the right to build a pipeline, it assumes a legal obligation to compensate those harmed by the construction, and to cover future financial, property, and environmental damage caused by the pipeline’s operation.
The underlying principle is that a good public policy either requires those gaining from the policy to compensate the losers directly, or subjects those gains to taxes or fees with which the government compensates those who are harmed. Either way, compensation is hardly a scheme for radical income redistribution. Rather, it is the property that economic textbooks require a policy to satisfy in order to be “Pareto efficient.” It is also exactly what makes good public policy compatible with a free-market economy. This commonsense principle can thus be used as a yardstick for assessing US growth and economic policy over the last half-century.
The Changing Economic Landscape
Since the 1970s, inequality of income and wealth has increased sharply. Real (inflation-adjusted) wages have risen little, and workers have not shared in productivity gains since 1973. Wage stagnation has been driven by the information technology (IT) revolution, which accelerated automation. Another factor contributing to anemic wage growth, and to declining US manufacturing employment, is the “China shock”: the post-2000 period of rapid growth that turned China into the world’s IT manufacturing hub.
IT-driven automation proceeded at the same time that corporate market power was rising. Because technological improvements are the crucial engine of rising productivity and growth, IT advances are universally viewed as economically beneficial. But, as I show in recent research, IT has a dark side: by enabling and supporting the rise of corporate monopoly power, IT innovations have caused the rise in inequality and contributed to the slowdown in wage growth.
I use the term monopoly power in its broadest sense to include all forms of non-competitive market power (on the part of sellers or buyers). A firm’s monopoly power arises from its ability to block or impede market entry by potential competitors. This power allows the firm, in two possible ways, to increase its profits above levels that would exist under competition. A firm with seller monopoly power can raise the prices that it charges customers for its products above levels that would exist in more competitive markets; and if it has a buyer monopoly power, it can lower wages and the prices it pays its suppliers.
So how does IT cause an increase in monopoly power?
All innovations lead to some monopoly power for the innovator, owing to patents and copyrights. Therefore, IT innovations endow their creators with initial monopoly positions as the sole proprietors of valuable knowledge or information, which they can prevent others from using. This is the core of IT monopoly power: the market value of their right to prevent others from using proprietaryknowledge.
Once an IT monopoly is established, it endows the company with the advantage of first mover. A combination of associated factors – additional patents, intellectual-property rights, trade secrets, falling computing and storage costs, and decreasing network user costs – then enable the company to consolidate market power, raise barriers to competition, and make it virtually impossible for potential competitors to break its power. IT networks endow a market leader with economies of scale that allow it to grow rapidly. Using their market power, such firms choke off innovations that threaten their position, often by purchasing competing firms.
To be sure, today’s leading tech firms make positive contributions to society. And though some use unlawful tactics, it is worth remembering that their IT-generated monopoly power is promoted by policies meant to foster innovations and protect innovators’ intellectual-property rights.
This point is crucial and merits examples. Biotechnology drug companies such as Celgene have monopoly power because the law grants them ownership rights to specific drugs for a number of years before generics can be introduced into the market. Similarly, Google, Facebook, and other social-media companies have monopoly power in the advertising market because, under current law, they can use, buy, or sell the personal data of the public they serve. Any legal changes to privacy protections could therefore undercut their monopoly power and profitability.
It is important to distinguish between these legally protected forms of monopoly power and the monopoly power that arises from unlawful collusion and price fixing. When legal monopoly power is modest, the threat it poses tends to be outweighed by an innovator’s positive contributions. So how extensive is this kind of market power today?
The Massive Effect of Rising Monopoly Power
Monopoly power enables companies to earn abnormal, uncompetitive profits, which, in turn, cause stock prices to rise above normal competitive levels. Stock prices and corporate profits fluctuate over time. But a case of sustained profits and rising stock prices above normal levels implies that values are not based on purely chance events, but rather on monopoly power. Accordingly, profits due to monopoly power are called monopoly profits, and the part of a company’s market value that reflects monopoly power is called monopoly wealth.
Let’s start with monopoly profits. Income created by a company with monopoly power is divided into three parts: labor income, normal interest income paid to capital employed, and monopoly profits. Several researchers have shown that monopoly profits have risen dramatically in the last three decades, from near zero in the early 1980s to $2.1 trillion – equivalent to 23% of total US corporate income – in 2015. During the same period, monopoly power caused the combined shares of wages and interest paid to capital to decline by 23 percentage points. While productivity and growth boosted total wage and capital incomes, monopoly power reduced their proportional shares, thus slowing their growth.
Likewise, monopoly wealth was virtually zero in 1982, but rose dramatically as IT innovations spread. By December 2015, monopoly wealth had reached $23.8 trillion, or 82% of the stock market’s total value at the time. Bear in mind that this is the extra wealth gained by stockholders above the wealth increment attained through normal savings and added capital assets such as buildings, factories, and so forth.
Over time, these changes shifted the distribution of income and wealth away from workers and toward the owners of financial assets. But IT innovations also increased income and wealth inequality among individuals. Because IT has caused increased profits and stock prices, monopoly gains have taken the form of large paydays for managers, and dividends and capital gains that benefit only shareholders. And, because a very small proportion of very wealthy individuals owns a very large proportion of all stocks, most gains from corporate monopoly power were received by a sliver of wealthy individuals. And the 2017 tax “reform” that US President Donald Trump signed in December transfers an additional $2 trillion their way.
IT has thus reshaped the US economic and social landscape, both by fueling the rise of corporate monopoly power and also by undermining the position of labor. It has altered the balance of market power in favor of corporations and against their customers, workers, and suppliers. And it has had a profoundly negative impact on lower-skill workers, in particular.
Despair in the Labor Market
In recent years, scholars and policymakers have been paying greater attention to the human costs of technological change and international trade, particularly the costs borne by the 60% of the US labor force comprising workers without a college degree. These costs are even higher for those without high-school diplomas. The data indicate that these workers are experiencing increased rates of obesity, alcoholism, drug abuse, family breakdown, and chronic ailments like diabetes and cardiovascular and circulatory disease.
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Recent research attributes this mounting misery to the workplace. Nuria Chinchilla of the IESE Business School, for example, has been warning since 2005 that the American work culture is having a destructive effect on family life. She argues that the workplace makes excessive demands on employees to work unreasonable hours and adapt unfailingly to changing job needs. These pressures have led workers constantly to fear for their jobs, while contributing to higher divorce rates and deteriorating health.
In 2015, the economists Anne Case and Angus Deaton also put a spotlight on declining health. They discovered a trend, dating back to the 1990s, of increased mortality among middle-aged white Americans. This finding is particularly surprising, given that advances in medicine over the past half-century have increased life expectancy at middle age. According to Case and Deaton, a large cohort of Americans has succumbed to “deaths of despair,” done in by drugs, alcohol, or suicide. In many cases, the victims of this trend have been formerly thriving blue-collar workers whose working conditions deteriorated over time.
Jeffrey Pfeffer of the Stanford Graduate School of Business expands on these observations in his new book, Dying for a Paycheck. Pfeffer shows that there has been a general deterioration in the workplace, particularly for lower-level employees. He demonstrates that growing corporate demands on workers and fear of losing their jobs lead to work-family conflicts and increased stress, causing deteriorating health. He estimates that workplace conditions in the US increase the number of deaths by 120,000 each year, making the workplace the fifth leading cause of death. These conditions also account for 8% of all medical costs in the US.
Finally, extensive research by Princeton University’s Alan Krueger and others shows that there has been an increase in employer practices aimed at disempowering lower-ranking workers. These practices include the widespread use of unnecessary non-compete clauses, which make it harder for workers to seek alternative employment; wage fixing by employers in company towns and rural or remote locations; and the increased use of contract-labor companies that turn workers into a traded commodity.
Contract-labor firms recruit workers on temporary contracts and pay low wages with minimal to no benefits. The contracted workers are then sent to work at client firms that have no long-term relationship with them. This practice may be suitable for some of those in the “gig economy” pursuing only part-time work. But it is clearly detrimental to lower-educated workers seeking long-term employment and a chance to develop their skills through on-the-job experience.
The contract model is sharply at odds with, say, Germany’s apprenticeship system. Not only does Germany’s system offer workers better opportunities; it also provides a constant stream of highly qualified industrial workers, who go on to produce top-quality German products. Every year, 500,000 young candidates enter the program; and over the course of a year, each receives a one-week dispensation every month to attend a government-funded trade college. Having received a year of both expert and on-the-job training, they are awarded a certification of proficiency in their chosen area. An apprentice system has been started in the US, but its scale and funding are minimal.
In sum, the problem for lower-ranking workers in the US is not just low wages. It is that the IT transformation has made work a source of despair rather than a source of pride and security. In addition to producing economic inefficiencies, these conditions also create political time bombs, because economic insecurity makes voters more susceptible to demagogic appeals. These factors have already had a pivotal effect, visible in the outcome of the 2016 US presidential election.
Our Current Policy
Although corporate monopoly power is the result of a wave of IT innovations, this wave was also made possible by the US social environment, its legal structure, and policies to promote innovations. America’s open society allows free exchange of ideas and interaction between entrepreneurs and researchers. The US constitution protects property rights, and its laws protect intellectual property rights.
This legal framework enables innovators to appropriate the benefits of their creativity. At the same time, a growing segment of less-educated workers, innocent bystanders to the IT transformation, are now being left behind. Research has shown that for this labor segment, adjusting to such monumental changes is a much slower and costlier process than might have been presumed.
After all, the most valuable asset blue-collar workers without college degrees have is their human capital and skills, which they acquire over many years of on-the-job experience. Hence, when a blue-collar job disappears, a 50-year-old worker sustains a major loss, and has very limited options for building a new career. Retraining such workers to take on more modern jobs is difficult and expensive. And while they can sometimes pursue opportunities in another location, doing so is costly and typically requires separation from family and friends. The same applies to younger, less-educated workers, except that the younger a worker is, the better are the options for establishing a new life.
All told, current US public policy promotes innovation, and US law enables corporate holders of intellectual-property rights to appropriate the gains from innovation and trade and base operations globally. This approach has been successful in promoting growth, but not in compensating displaced workers and others who suffer as a consequence. Even if workers had a crystal ball that could predict the destruction of their jobs, they lacked the tools to insure themselves against such outcomes. The failure to institute a program to salvage the lives of dislocated workers has damaged the efficiency of the US free-market economy.
The discriminatory policy approach underlying this failure is derived from the view that the government should not engage in redistribution, and that automation, innovation, and trade should be left for the market to sort out. According to this view, the creative destruction that economic growth entails is natural and, in the long run, beneficial to society. So, if we want the long-term benefits, we must accept the market’s verdict and forgo government intervention.
But, again, there is nothing natural about the IT-driven changes of the past few decades. They are all consequences of man-made laws and public policies. When a Silicon Valley innovator is successful in developing a business, it is in part because US laws and the country’s physical and social infrastructure enabled that success. Thus, in accord with the principle of required compensation, the total social gains from an innovation or trade should also serve as a source of funds to help those workers displaced by it.
Silicon Valley entrepreneurs take pride in disrupting the prevailing order, and they are right to view creative destruction as being vital to growth and development. But they should revisit their views about what constitutes a free-market economy, what makes innovation possible in such an economy, and what role public policy should play in redressing harm to workers who find themselves on the receiving end of disruptive change.
Toward a New Policy
Apart from temporary unemployment benefits, some firms do pay displaced workers severance benefits; but those payments tend to be too small, not least because job destruction usually occurs at declining firms that lack the funds to compensate workers. A national program to restore the livelihoods of displaced workers would find it relatively easy to identify those who qualify for support. And that support would be small for those younger workers who could quickly be placed in new jobs. The cost of compensating older workers will be higher, depending upon age and ability to be retrained for alternative employment.
Ideally, a compensation policy would attempt to identify the gains from innovation, and then tax them to create the needed public fund. But this might fail if the gains prove difficult to account for. Much of the net gains from the IT transformation are monopoly profits and gains from trade; but there have also been widespread consumer benefits (consumer surplus). Moreover, some consumer gains do accrue to employed workers, which constitutes partial compensation.
Nevertheless, aiming for a practical solution, we know that 82% of all dividend payments and all capital gains are monopoly profits that accrue to the owners of corporate shares, which are concentrated in the hands of the wealthy. It follows, therefore, that progressive taxation of income and capital gains is the best approximation with which to fund a program for restoring workers’ livelihoods. Unfortunately, the 2017 tax “reform” went in the opposite direction: instead of increasing progressivity with higher marginal rates on high incomes, it lowered the tax rates of the very wealthy.
In addition to compensating displaced workers, a good policy would aim to reduce workplace stress and improve efficiency. To that end, public policy can contribute in three ways. First, it can strengthen the Affordable Care Act (Obamacare) to make health care universal and less expensive for workers. Second, it can mandate annual paid vacations to afford all workers a period of rest. And, third, it can enforce antitrust laws to prevent practices that restrict workers’ employment choices.
But the government itself cannot change workplace culture. Only institutions responding to local needs can have the desired impact on the ground, and it is not clear which institutions could fulfill such a mission. One idea worth discussing is to promote a new, reformed version of private-sector unions. We need an entity that can collectively negotiate wages and working conditions. Such an entity would not only contribute to stopping some of the unfair labor practices noted earlier, but could also provide social services – including job search, occupational retraining, marriage and financial counseling, addiction treatment, and wellness programs – to help members solve various personal problems.
Worker assistance can take many different forms, but the general principle would be that the union acts as a frontline provider of counseling service to help refer workers to specialists. Once a need is identified, public funds could be tapped for some of these services (such as addiction treatment), thereby supplementing union and individual resources.
While I am under no illusion that the Trump administration would take any of these steps, these ideas should be more widely debated. They are not new. European unions have a long tradition of offering insurance as part of their self-help efforts, or managing insurance plans established through collective bargaining. For example, in France and Sweden, unions participate with employers on boards that manage private-sector employees’ pension plans. And, under the so-called Ghent system, unions in Belgium, Denmark, Finland, Iceland, and Sweden manage union and public funds, and even disburse welfare and unemployment payments. In Germany, union cooperation is central to the country’s massive apprenticeship program.
Whatever the solution, rising corporate monopoly power and the growing despair of workers, both the result of the IT revolution, can no longer be ignored. The current situation is not just deeply unfair. If unchecked, it threatens to precipitate political strife and economic turmoil, with disastrous consequences. Neither economic efficiency nor democratic stability can be sustained if the wealthiest individuals continue to enjoy falling taxation on rapidly rising monopoly profits, while the vast majority of working Americans live in neglect and despair.
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STANFORD – Have we entered a new Gilded Age, in which tech monopolies wield enormous political and economic power in the same way that Standard Oil did at the end of the nineteenth century? The scale of wealth being produced for a select few, along with the mounting despair of workers who are left behind by technology-driven economic change, certainly suggests that growing monopoly power is strangling parts of our economy. But the monopolies of the Gilded Age were very different corporate creatures from the technology driven monopolies that have arisen in recent decades.
The Gilded Age monopolies were created via collusion, intimidation and bribery by corporate bosses. They were eventually rendered illegal by antitrust laws. Today’s monopolies, however, are legal and were created by true innovators who received various forms of legal protection as their firms rose to dominance. John D Rockefeller, J. P. Morgan, Andrew Carnegie or Cornelius Vanderbilt were corporate bosses, not innovators like Jeff Bezos, Sergey Brin, Steve Jobs and Mark Zuckerberg. So, in contrast to the antitrust policy of the past, what is needed today is an approach to monopoly power that relies on policy which is both subtle and complex. And this requires that we reconsider many of our prior biases and preconceptions about what a “free market” truly means, and about the role of government in that market.
Whereas the US government, in 1911, broke up Standard Oil into 34 companies for its violations of the 1890 Sherman Antitrust Act, an effective policy toward contemporary monopolies will require legal adaptation to the new reality: a new approach to taxation, regulation, patent laws and labor markets. Here, I focus on the labor market, and the need to establish a principle of “required compensation” for workers whose lives have been damaged by today’s new monopoly power. Such compensation should – indeed, must – be the basis of a strategy to correct the negative consequences of today’s misguided policies, which have allowed the increasing concentration of enormous wealth, accompanied by the despair of many millions of ordinary American workers who see the future foreclosed to them.
Surprisingly, given Silicon Valley’s supposed left-wing political orientation, many intelligent people in Big Tech reject such a principle for public policy, which runs strongly counter to the libertarian ideas that prevail in their industry. Companies, according to this view, have the God-given natural right to engage in “creative destruction,” without the government taxing them or otherwise interfering with them to compensate those whose lives are broken by the destructive side of innovation. But the conditions they support, and which prevail in the current labor market, are simply unsustainable, both politically and economically. Changing these conditions will require a better understanding of what a “free market” really is.
The case for government action can be made using common sense. When a government builds a road, it compensates landowners whose property is needed for the construction. When an oil company is granted the right to build a pipeline, it assumes a legal obligation to compensate those harmed by the construction, and to cover future financial, property, and environmental damage caused by the pipeline’s operation.
The underlying principle is that a good public policy either requires those gaining from the policy to compensate the losers directly, or subjects those gains to taxes or fees with which the government compensates those who are harmed. Either way, compensation is hardly a scheme for radical income redistribution. Rather, it is the property that economic textbooks require a policy to satisfy in order to be “Pareto efficient.” It is also exactly what makes good public policy compatible with a free-market economy. This commonsense principle can thus be used as a yardstick for assessing US growth and economic policy over the last half-century.
The Changing Economic Landscape
Since the 1970s, inequality of income and wealth has increased sharply. Real (inflation-adjusted) wages have risen little, and workers have not shared in productivity gains since 1973. Wage stagnation has been driven by the information technology (IT) revolution, which accelerated automation. Another factor contributing to anemic wage growth, and to declining US manufacturing employment, is the “China shock”: the post-2000 period of rapid growth that turned China into the world’s IT manufacturing hub.
IT-driven automation proceeded at the same time that corporate market power was rising. Because technological improvements are the crucial engine of rising productivity and growth, IT advances are universally viewed as economically beneficial. But, as I show in recent research, IT has a dark side: by enabling and supporting the rise of corporate monopoly power, IT innovations have caused the rise in inequality and contributed to the slowdown in wage growth.
I use the term monopoly power in its broadest sense to include all forms of non-competitive market power (on the part of sellers or buyers). A firm’s monopoly power arises from its ability to block or impede market entry by potential competitors. This power allows the firm, in two possible ways, to increase its profits above levels that would exist under competition. A firm with seller monopoly power can raise the prices that it charges customers for its products above levels that would exist in more competitive markets; and if it has a buyer monopoly power, it can lower wages and the prices it pays its suppliers.
So how does IT cause an increase in monopoly power?
All innovations lead to some monopoly power for the innovator, owing to patents and copyrights. Therefore, IT innovations endow their creators with initial monopoly positions as the sole proprietors of valuable knowledge or information, which they can prevent others from using. This is the core of IT monopoly power: the market value of their right to prevent others from using proprietaryknowledge.
Once an IT monopoly is established, it endows the company with the advantage of first mover. A combination of associated factors – additional patents, intellectual-property rights, trade secrets, falling computing and storage costs, and decreasing network user costs – then enable the company to consolidate market power, raise barriers to competition, and make it virtually impossible for potential competitors to break its power. IT networks endow a market leader with economies of scale that allow it to grow rapidly. Using their market power, such firms choke off innovations that threaten their position, often by purchasing competing firms.
To be sure, today’s leading tech firms make positive contributions to society. And though some use unlawful tactics, it is worth remembering that their IT-generated monopoly power is promoted by policies meant to foster innovations and protect innovators’ intellectual-property rights.
This point is crucial and merits examples. Biotechnology drug companies such as Celgene have monopoly power because the law grants them ownership rights to specific drugs for a number of years before generics can be introduced into the market. Similarly, Google, Facebook, and other social-media companies have monopoly power in the advertising market because, under current law, they can use, buy, or sell the personal data of the public they serve. Any legal changes to privacy protections could therefore undercut their monopoly power and profitability.
It is important to distinguish between these legally protected forms of monopoly power and the monopoly power that arises from unlawful collusion and price fixing. When legal monopoly power is modest, the threat it poses tends to be outweighed by an innovator’s positive contributions. So how extensive is this kind of market power today?
The Massive Effect of Rising Monopoly Power
Monopoly power enables companies to earn abnormal, uncompetitive profits, which, in turn, cause stock prices to rise above normal competitive levels. Stock prices and corporate profits fluctuate over time. But a case of sustained profits and rising stock prices above normal levels implies that values are not based on purely chance events, but rather on monopoly power. Accordingly, profits due to monopoly power are called monopoly profits, and the part of a company’s market value that reflects monopoly power is called monopoly wealth.
Let’s start with monopoly profits. Income created by a company with monopoly power is divided into three parts: labor income, normal interest income paid to capital employed, and monopoly profits. Several researchers have shown that monopoly profits have risen dramatically in the last three decades, from near zero in the early 1980s to $2.1 trillion – equivalent to 23% of total US corporate income – in 2015. During the same period, monopoly power caused the combined shares of wages and interest paid to capital to decline by 23 percentage points. While productivity and growth boosted total wage and capital incomes, monopoly power reduced their proportional shares, thus slowing their growth.
Likewise, monopoly wealth was virtually zero in 1982, but rose dramatically as IT innovations spread. By December 2015, monopoly wealth had reached $23.8 trillion, or 82% of the stock market’s total value at the time. Bear in mind that this is the extra wealth gained by stockholders above the wealth increment attained through normal savings and added capital assets such as buildings, factories, and so forth.
Over time, these changes shifted the distribution of income and wealth away from workers and toward the owners of financial assets. But IT innovations also increased income and wealth inequality among individuals. Because IT has caused increased profits and stock prices, monopoly gains have taken the form of large paydays for managers, and dividends and capital gains that benefit only shareholders. And, because a very small proportion of very wealthy individuals owns a very large proportion of all stocks, most gains from corporate monopoly power were received by a sliver of wealthy individuals. And the 2017 tax “reform” that US President Donald Trump signed in December transfers an additional $2 trillion their way.
IT has thus reshaped the US economic and social landscape, both by fueling the rise of corporate monopoly power and also by undermining the position of labor. It has altered the balance of market power in favor of corporations and against their customers, workers, and suppliers. And it has had a profoundly negative impact on lower-skill workers, in particular.
Despair in the Labor Market
In recent years, scholars and policymakers have been paying greater attention to the human costs of technological change and international trade, particularly the costs borne by the 60% of the US labor force comprising workers without a college degree. These costs are even higher for those without high-school diplomas. The data indicate that these workers are experiencing increased rates of obesity, alcoholism, drug abuse, family breakdown, and chronic ailments like diabetes and cardiovascular and circulatory disease.
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Recent research attributes this mounting misery to the workplace. Nuria Chinchilla of the IESE Business School, for example, has been warning since 2005 that the American work culture is having a destructive effect on family life. She argues that the workplace makes excessive demands on employees to work unreasonable hours and adapt unfailingly to changing job needs. These pressures have led workers constantly to fear for their jobs, while contributing to higher divorce rates and deteriorating health.
In 2015, the economists Anne Case and Angus Deaton also put a spotlight on declining health. They discovered a trend, dating back to the 1990s, of increased mortality among middle-aged white Americans. This finding is particularly surprising, given that advances in medicine over the past half-century have increased life expectancy at middle age. According to Case and Deaton, a large cohort of Americans has succumbed to “deaths of despair,” done in by drugs, alcohol, or suicide. In many cases, the victims of this trend have been formerly thriving blue-collar workers whose working conditions deteriorated over time.
Jeffrey Pfeffer of the Stanford Graduate School of Business expands on these observations in his new book, Dying for a Paycheck. Pfeffer shows that there has been a general deterioration in the workplace, particularly for lower-level employees. He demonstrates that growing corporate demands on workers and fear of losing their jobs lead to work-family conflicts and increased stress, causing deteriorating health. He estimates that workplace conditions in the US increase the number of deaths by 120,000 each year, making the workplace the fifth leading cause of death. These conditions also account for 8% of all medical costs in the US.
Finally, extensive research by Princeton University’s Alan Krueger and others shows that there has been an increase in employer practices aimed at disempowering lower-ranking workers. These practices include the widespread use of unnecessary non-compete clauses, which make it harder for workers to seek alternative employment; wage fixing by employers in company towns and rural or remote locations; and the increased use of contract-labor companies that turn workers into a traded commodity.
Contract-labor firms recruit workers on temporary contracts and pay low wages with minimal to no benefits. The contracted workers are then sent to work at client firms that have no long-term relationship with them. This practice may be suitable for some of those in the “gig economy” pursuing only part-time work. But it is clearly detrimental to lower-educated workers seeking long-term employment and a chance to develop their skills through on-the-job experience.
The contract model is sharply at odds with, say, Germany’s apprenticeship system. Not only does Germany’s system offer workers better opportunities; it also provides a constant stream of highly qualified industrial workers, who go on to produce top-quality German products. Every year, 500,000 young candidates enter the program; and over the course of a year, each receives a one-week dispensation every month to attend a government-funded trade college. Having received a year of both expert and on-the-job training, they are awarded a certification of proficiency in their chosen area. An apprentice system has been started in the US, but its scale and funding are minimal.
In sum, the problem for lower-ranking workers in the US is not just low wages. It is that the IT transformation has made work a source of despair rather than a source of pride and security. In addition to producing economic inefficiencies, these conditions also create political time bombs, because economic insecurity makes voters more susceptible to demagogic appeals. These factors have already had a pivotal effect, visible in the outcome of the 2016 US presidential election.
Our Current Policy
Although corporate monopoly power is the result of a wave of IT innovations, this wave was also made possible by the US social environment, its legal structure, and policies to promote innovations. America’s open society allows free exchange of ideas and interaction between entrepreneurs and researchers. The US constitution protects property rights, and its laws protect intellectual property rights.
This legal framework enables innovators to appropriate the benefits of their creativity. At the same time, a growing segment of less-educated workers, innocent bystanders to the IT transformation, are now being left behind. Research has shown that for this labor segment, adjusting to such monumental changes is a much slower and costlier process than might have been presumed.
After all, the most valuable asset blue-collar workers without college degrees have is their human capital and skills, which they acquire over many years of on-the-job experience. Hence, when a blue-collar job disappears, a 50-year-old worker sustains a major loss, and has very limited options for building a new career. Retraining such workers to take on more modern jobs is difficult and expensive. And while they can sometimes pursue opportunities in another location, doing so is costly and typically requires separation from family and friends. The same applies to younger, less-educated workers, except that the younger a worker is, the better are the options for establishing a new life.
All told, current US public policy promotes innovation, and US law enables corporate holders of intellectual-property rights to appropriate the gains from innovation and trade and base operations globally. This approach has been successful in promoting growth, but not in compensating displaced workers and others who suffer as a consequence. Even if workers had a crystal ball that could predict the destruction of their jobs, they lacked the tools to insure themselves against such outcomes. The failure to institute a program to salvage the lives of dislocated workers has damaged the efficiency of the US free-market economy.
The discriminatory policy approach underlying this failure is derived from the view that the government should not engage in redistribution, and that automation, innovation, and trade should be left for the market to sort out. According to this view, the creative destruction that economic growth entails is natural and, in the long run, beneficial to society. So, if we want the long-term benefits, we must accept the market’s verdict and forgo government intervention.
But, again, there is nothing natural about the IT-driven changes of the past few decades. They are all consequences of man-made laws and public policies. When a Silicon Valley innovator is successful in developing a business, it is in part because US laws and the country’s physical and social infrastructure enabled that success. Thus, in accord with the principle of required compensation, the total social gains from an innovation or trade should also serve as a source of funds to help those workers displaced by it.
Silicon Valley entrepreneurs take pride in disrupting the prevailing order, and they are right to view creative destruction as being vital to growth and development. But they should revisit their views about what constitutes a free-market economy, what makes innovation possible in such an economy, and what role public policy should play in redressing harm to workers who find themselves on the receiving end of disruptive change.
Toward a New Policy
Apart from temporary unemployment benefits, some firms do pay displaced workers severance benefits; but those payments tend to be too small, not least because job destruction usually occurs at declining firms that lack the funds to compensate workers. A national program to restore the livelihoods of displaced workers would find it relatively easy to identify those who qualify for support. And that support would be small for those younger workers who could quickly be placed in new jobs. The cost of compensating older workers will be higher, depending upon age and ability to be retrained for alternative employment.
Ideally, a compensation policy would attempt to identify the gains from innovation, and then tax them to create the needed public fund. But this might fail if the gains prove difficult to account for. Much of the net gains from the IT transformation are monopoly profits and gains from trade; but there have also been widespread consumer benefits (consumer surplus). Moreover, some consumer gains do accrue to employed workers, which constitutes partial compensation.
Nevertheless, aiming for a practical solution, we know that 82% of all dividend payments and all capital gains are monopoly profits that accrue to the owners of corporate shares, which are concentrated in the hands of the wealthy. It follows, therefore, that progressive taxation of income and capital gains is the best approximation with which to fund a program for restoring workers’ livelihoods. Unfortunately, the 2017 tax “reform” went in the opposite direction: instead of increasing progressivity with higher marginal rates on high incomes, it lowered the tax rates of the very wealthy.
In addition to compensating displaced workers, a good policy would aim to reduce workplace stress and improve efficiency. To that end, public policy can contribute in three ways. First, it can strengthen the Affordable Care Act (Obamacare) to make health care universal and less expensive for workers. Second, it can mandate annual paid vacations to afford all workers a period of rest. And, third, it can enforce antitrust laws to prevent practices that restrict workers’ employment choices.
But the government itself cannot change workplace culture. Only institutions responding to local needs can have the desired impact on the ground, and it is not clear which institutions could fulfill such a mission. One idea worth discussing is to promote a new, reformed version of private-sector unions. We need an entity that can collectively negotiate wages and working conditions. Such an entity would not only contribute to stopping some of the unfair labor practices noted earlier, but could also provide social services – including job search, occupational retraining, marriage and financial counseling, addiction treatment, and wellness programs – to help members solve various personal problems.
Worker assistance can take many different forms, but the general principle would be that the union acts as a frontline provider of counseling service to help refer workers to specialists. Once a need is identified, public funds could be tapped for some of these services (such as addiction treatment), thereby supplementing union and individual resources.
While I am under no illusion that the Trump administration would take any of these steps, these ideas should be more widely debated. They are not new. European unions have a long tradition of offering insurance as part of their self-help efforts, or managing insurance plans established through collective bargaining. For example, in France and Sweden, unions participate with employers on boards that manage private-sector employees’ pension plans. And, under the so-called Ghent system, unions in Belgium, Denmark, Finland, Iceland, and Sweden manage union and public funds, and even disburse welfare and unemployment payments. In Germany, union cooperation is central to the country’s massive apprenticeship program.
Whatever the solution, rising corporate monopoly power and the growing despair of workers, both the result of the IT revolution, can no longer be ignored. The current situation is not just deeply unfair. If unchecked, it threatens to precipitate political strife and economic turmoil, with disastrous consequences. Neither economic efficiency nor democratic stability can be sustained if the wealthiest individuals continue to enjoy falling taxation on rapidly rising monopoly profits, while the vast majority of working Americans live in neglect and despair.